Continue down same (SFR) path or branch out (MFR) / Pvt Lending

3 Replies

So, I've come to a crossroads in planning for the future and I'm trying to figure out what my next move should be.

I like the idea of buy and holds and I invest in Arizona as that's where I currently live.  I would rather keep investing in state if possible.

I have two condos that I'm cashflowing about $600 (total) on after everything is paid for and reserves are stored. I have enough money in the bank to start looking for my 3rd rental property as long as I stay with the same size condos (80-100K condo, 20-25K down). (I expect around $200-300 per door in this market). That would take me down to nothing left besides my reserves for CapEx. What that means is I would have to start saving again (at about 800-900 a month). So It would take me a while before I could buy another property.

This is the safe option as my two rentals are doing pretty decent right now and I am happy with the tenants in them.

I have two other options that I'm looking into, but definitely am not as comfortable with.  Both require me to sell the two rentals that I currently have.  After my sales go through, I would have about 100-120K to play with.  

Option 1: Go into Private lending for small fix/flip projects.  This would potentially be less hassle as long as I vet the people borrowing from me.  But after that would be pretty much passive. (once I found a couple fix/flip investors that I like and am comfortable with).  I know there is quite a bit of paperwork and networking I would need to do to go down this route, but it's definitely interesting to me.  I'm curious as to what my returns would look like for this option (I know very little about this side, and doubt I have enough money to really jump in on this type of investing, but I want to explore it as I move forward).  Also, I believe the tax advantages of this method are worse off than owning actual real estate?  

Note: I believe how I would get involved in this sense would be to piggyback with a HML? Wouldn't be as lucrative, but would get me into the game so I can see how it's done in a proper fashion?

Option 2: Go big.  I like being able to see my investment and have some hands on duties with it.  Though if I went big, I would definitely relinquish all of the day to day and maintenance etc.  The problem that I'm running into is I can't really go big in Arizona.  with 100K, I could potentially purchase up to a 500K property.  So that would be roughly an 8 unit property.  60K per door.  Rents would be between 500-600.  I'd see about 900-1200 per month after everything has been paid.  The advantage of this is it factors in Property Management, so I wouldn't have to deal with it anymore, but it's still a wash if I purchase a 3rd unit from a cash flow standpoint.

From an economy of scale perspective, it makes sense to get the 8 unit:

More units to spread out risk

PM doing all work instead of me (which is vital if I'm going to keep growing) (Portfolio loan, so worse loan terms, but 1 loan instead of 3).

But more potential for turnover, more problems (most likely) as the units are more run down than my current properties, etc.  Also, I would now have to manage a 1031 exchange where I have to sell both condos at about the same time.

Hey Paul, I don't like the idea of selling the two current investment properties and rolling that money into an HML type of venture. Yes, it may seem more lucrative when looking in from the outside, but there are many hurdles that HMLs have to go through from my understanding. I'm no expert, but I think it's better to stick to what you're best at. You have been slowly growing your portfolio of properties and I would continue down that path. However, if you really want to get into flipping, did you consider purchasing REO or properties that require rehab? Even though you may have limited capital to get started, you can utilize a HML to get you going. Just my two cents for what it's worth! Good luck! - GC

I do both BUT...use my 401K for lending and hold my rentals outside of my retirement account so I can live on the income. Since you have two rentals doing well, I would hold those. If you have a retirement account that you can use for HML I would go that route. Also look at your state laws considering licensing for lending purposes. Beware Dodd-Frank if you start lending.

Thanks for the replies.. I'm not a huge fan of purchasing REO or rehab properties because I have a full time job doing something else, and use Real Estate as a side venture. So, while I could potentially be the money partner (and anything that doesn't require constant oversight, so sifting through data, picking properties, etc) in a REO job, that is all that I could possibly offer from a time perspective.

For your 401K for lending, I'm assuming you have a solo 401K?  I could potentially take a 50K loan from my 401K, but I really want to save that for an o crap moment if I ever have one.

What kind of capital does one need to have to really get into HML / Private Lending successfully? I'm thinking more than 100K as well...

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